Picking Your Tick: Toward a New Theory of Stock Splits

Thanks to stock splits, the average nominal share price has been amazingly stable in the United States. The average NYSE share price has fluctuated within the $30 to $40 range since the late 1930s—a period in which most consumer prices have increased by a factor of 10 and the S&P index has risen over 1,500%. Why has this nominal price been so stable when every other price has increased so much? And why do typical stock prices vary so greatly among different countries? For example, the median nominal stock price ranges from about $2 in Hong Kong and $7 in the U.K., to $103 in France and over $600 in Switzerland. The author's recent research suggests that typical stock prices vary across countries in ways that reflect primarily differences in how markets in each country set their “tick” rules—the rules governing the minimum price variation that can occur in a stock (in the U.S., for example, the tick was recently reduced from $1/8 to $1/16). Companies, on average, appear to respond to the resulting differences in tick size by adjusting the number of their shares outstanding so that the tick size relative to the nominal share price remains relatively constant. In fact, a tick size equal to about 25 basis points of the median share price “appears to be a universal norm” across global markets. This article explores how and why a company might wish to affect the relative tick size for its stock by splitting—and, in so doing, it suggests a “new theory” of stock splits. The theory also suggests that the optimal tick size for any given company will vary according to its size, visibility, and riskiness.